Analysis: Iraq-US energy ties, once seen as oil deal bonanza, mired in geopolitics

Dubai — Iraq's energy ties with the US, which were supposed to yield oil deals following the 2003 invasion, have been whittled down to waivers to OPEC's second biggest producer to import Iranian electricity and gas, and avoid a political meltdown of the fragile Baghdad government, according to analysts.

US energy companies did not benefit much from the rule of the Coalition Provisional Authority -- the US-appointed entity that governed Iraq post the 2003 invasion until 2004 -- and they seem unlikely to gain a foothold in the oil sector of a country fighting a resurgent Islamic State, grappling with protests and facing financial collapse from low oil prices.

"The expectations of US policy-makers in the early years was that US companies would enjoy competitive advantage in a liberalized Iraqi oil and gas sector," said Raad Alkadiri, senior director at the BCG Center for Energy Impact.

"Iraq's sector has remained state-owned and state-guided, and US companies have been forced to compete in open licensing rounds. Various efforts by US Administrations (including the current Trump Administration) to engineer bilateral negotiations and to promote US company interests have come to naught."

US visit

Energy ties are expected to come to the fore during the upcoming visit of Prime Minister Mustafa al-Kadhimi to Washington this month, where he will meet President Donald Trump on Aug. 20. It would be his second official visit as prime minister after his state visit to Tehran in July.

"With Iraq, the US puts a high priority on sector reform, self-sufficiency and opportunities for American companies," said Matthew Reed, vice president of Washington-based Foreign Reports.

"Trump wants to see US firms signing deals with Baghdad, although that may not be in the cards on this trip, given Iraq's dire financial situation."

So far, only Exxon Mobil has managed to play a tangible role in Iraq's energy sector, as operator of the giant West Qurna 1 field in southern Iraq and a partner with Norway's DNO in the Baeshiqa license in the semi-autonomous Kurdish region north of the country. It is the only major energy company operating in both Iraq and the Kurdish region.

But European and Asian companies dominate the energy sector in these regions.

BP operates with China National Petroleum Corp. the giant southern Rumaila field, which can produce around 1.5 million b/d out of Iraq's estimated 5 million b/d capacity. Italy's Eni runs the Zubair field, while Russia's Lukoil operates West Qurna 2.

No foothold

"The US never had a foothold in the Iraqi energy sector in any meaningful way," said Alkadiri. "The reality is that European and Asian companies have been more willing to accept onerous terms than the US ones."

Other major US energy companies working in Iraq include oil services company Halliburton, which once counted Dick Cheney as CEO and chairman before he became a the US vice president between 2001-2009.

Also, GE operates in Iraq, and in 2018 it signed a principles of cooperation agreement with the country's electricity ministry, which provided an action plan to add up to 14 GW of power. Currently, Iraq roughly produces between 16-18 GW/day.

Iraq's handling of contracts and its near financial collapse have also been weighing on its ties with the US.

"If Baghdad wants its energy projects to move forward, with minimal impact on its treasury, it should spare no effort to attract private capital," said Dan Brouillette, US Secretary of Energy, on July 23.

"And that means creating a climate of commercial certainty, based upon the rule of law, by fully honoring contracts and by making timely payment in both good times and bad. Doing so will open the door to foreign capital and expertise, including US companies."

Last year, Exxon Mobil and PetroChina were still talking to the Iraqi government to run the Southern Iraq Integrated Project, but Exxon's pullout of staff temporarily in 2019 over the security situation in the country has delayed plans for the project.

SIIP

SIIP -- under negotiation since at least 2015 -- is a complex, multifaceted project worth tens of billions of dollars and involves an important water injection part.

"A long-delayed but crucial water injection project for southern fields remains stuck in negotiations, both of which indicate that protracted talks over contractual terms remain an obstacle to meeting lofty production targets," said Paul Sheldon, head of geopolitical analysis for S&P Global Platts Analytics.

US-Iraqi energy ties are further complicated by Baghdad's close relationship with Iran, which has been under renewed US sanctions since 2018.

Iran still wields influence in Iraq, which at the same time has been receiving US waivers since 2018 to continue to import electricity and gas from Tehran.

"US efforts to lower Iraqi dependence on Iranian gas and power represent the largest energy issue between the two countries," said Sheldon. "Looking ahead, the imposition of US sanctions would likely have a destabilizing impact on Iraq, and would risk push Baghdad closer to Tehran politically."